Raising taxes and increasing welfare payments ?
Correct answer: D. improves equity at the expense of efficiency.
- A. reduces market power
- B. Proves that there is such a thing as a free lunch
- C. improves efficiency at the expense of equity.
- D. improves equity at the expense of efficiency.
Explanation
Higher taxes and welfare transfers generally redistribute income toward greater equity, but taxation and transfers can reduce incentives to work, invest, or produce, creating an efficiency cost. Thus the usual trade-off is improved equity at the expense of efficiency.
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Government revenue and expenditure are analysed through taxation, public borrowing, budgets, subsidies, transfers and public debt. The topic explains how fiscal policy affects resource allocation, income distribution, economic stability and growth, while distinguishing direct from indirect taxes, progressive from regressive taxation, and public goods from goods supplied by private markets.
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